1988 (9) TMI 112 - AT - Income Tax

Summary

Issues Involved:
1. Estimation of Gross Profit
2. Method of Accounting for Profits
3. Rate of Profit Estimation

Detailed Analysis:

1. Estimation of Gross Profit:

The appellant, a partnership firm engaged in building construction, declared a loss of Rs. 4300 for the assessment year 1982-83. The Income Tax Officer (ITO) completed the assessment under section 143(3) of the IT Act, 1961, and determined the total income at Rs. 75,054 by estimating the gross profit at 15% of the construction cost. The ITO's rationale was that profit arises day-to-day in construction work, not only upon completion, and thus estimated the gross profit based on comparable data.

2. Method of Accounting for Profits:

The appellant contended that profits could only be ascertained upon the completion of the contract work and that any interim estimation would be speculative. The appellant argued that they followed a consistent method of accounting by recognizing profits only when the flats were completed and handed over. The Appellate Assistant Commissioner (AAC) rejected these contentions, upholding the ITO's method of estimating annual profits by relying on the Delhi High Court decision in *Tirathram Ahuja (P) Ltd. vs. CIT*. The Tribunal also supported this view, citing that each year is a self-contained unit for tax purposes, and profits should be computed annually unless it is impossible to do so.

3. Rate of Profit Estimation:

The AAC reduced the ITO's estimated gross profit rate from 15% to 10%, considering it more reasonable. The appellant, dissatisfied with this reduction, appealed further. The Tribunal, after hearing both parties, found the AAC's rate of 10% to be fair and reasonable. The Tribunal noted that the rate was applied to the construction cost recorded in the appellant's books, not the receipts amounting to nearly Rs. 10 lakhs. The Tribunal dismissed the appellant's contention for a further reduction to 7.5%, finding no basis for such a claim.

Conclusion:

The Tribunal upheld the departmental authorities' decision to estimate the appellant's profit annually, rejecting the argument that profits should only be recognized upon the completion of construction contracts. The Tribunal confirmed the AAC's reduced gross profit rate of 10% as fair and reasonable, thereby dismissing the appellant's appeal.